ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Flexibility, Employment and Labour Market Reforms in India

There is intense debate on labour market reforms in India today. It is argued that but for restrictive labour laws that create inflexibility in the labour market, the Indian economy would have experienced a higher growth of employment. On the other hand, this view is vehemently contested by trade unions and many other economists. This paper shows that the Indian labour market is quite flexible despite so-called restrictive labour laws. However, at the same time, Indian labour laws are so numerous, complex and even ambiguous that they promote litigation rather than the resolution of problems related to industrial relations. A comprehensive view on labour market reforms is required, one that addresses the needs of both employers and workers. The author recommends simplifying and rationalising the complex and ambiguous extant pieces of labour legislation into a simple code that allows for labour adjustment with adequate social and income security for the workers.

T he term labour market flexibility comes only next to globalisation in frequent occurrence in the discourse on economic growth nowadays. This is natural because labour flexibility formed part of the package called the Washington consensus. The framework for producing labour market flexibility was designed to deregulate the labour market and remove or cut protective regulations [Standing 2002]. The Washington consensus was based on what Stiglitz (2002) called market fundamentalism. The basic idea behind this thesis was that free market outcomes are efficient and Pareto optimal. The free play of market forces results in employment of resources at the market-clearing prices; this leads to both efficiency (as almost all resources are employed) and equity (all are rewarded according to their marginal contribution). Regulation of the market by the state leads to deviations from full employment of all resources. Hence, attempts should be made to remove as many of these imperfections in the market as possible so as to achieve full employment of all resources and optimal social welfare. In the case of labour market, trade unions and protective labour legislations are said to be market-distorting agents, which curtail the free operation of market forces to ensure full employment of labour. Interference by collective institutions (law and trade unions) in the market process increase transaction costs, which mar investment, thereby resulting in unemployment and welfare loss. These institutional interventions in the name of equity and social justice superimpose terms set above the market-clearing prices. As a result, markets do not clear, wages become sticky and the cost calculations of firms go haywire. These institutions not only tamper with the price and the essential market signals that enable efficient functioning of the market, but also affect the freedom of employers to adjust the quantities of resources, which, in turn, leads to unemployment. They also result in inequity because by protecting the interests of insiders, they hurt the chances of outsiders entering the labour market, who thus remain unemployed. A social divide is created, which perpetuates, inequality. While the outsiders remain scattered and their political power becomes diffused, the insiders, on the other hand, are well-organised and vocal, and influence policy decisions more than their unfortunate counterparts. Hence, it is strongly argued that the labour market should be deregulated for stimulating investment and employment, as well as equality in order to provide flexibility in entry and exit.

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